The HS Dent Financial Blog

RSS      

More deflation: Employed, but earning half as much

We don’t buy into conspiracy theories that the government intentionally distorts economic data as part of some kind of diabolical scheme to fleece the voting public.  These allegations pop up routinely, usually (though not always) in off-beat investment newsletters, and are particularly focused on the reported stats for inflation and unemployment.  (Somehow, using a core inflation gauge that excludes volatile items like food and fuel or using hedonic adjustments to account for technological improvements are forms of government chicanery…)

At any rate, while the numbers may not be lies or intentional distortions, this does not imply that they are complete or that they tell the whole story.  The official unemployment rate is 9.5%.  But this does not include people in this situation: “Still on the Job, but Making Only Half as Much.”

The New York Times gives an example of wage deflation in action:

[Bryan Lawlor] is now in the co-pilot’s seat in the 50-seat commuter jets he flies, not for any failure in skill. He wears his captain’s stripes, he explains, to make that point. But with air travel down, his employer cut costs by downgrading 130 captains, those with the lowest seniority, to first officers, automatically cutting the wage of each by roughly 50 percent — to $34,000 in Mr. Lawlor’s case.

The demotion, the loss of command, the cut in pay to less than his wife, Tracy, makes as a fourth-grade teacher, have diminished Mr. Lawlor, 34, in his own eyes. He still thinks he will return to being the family’s principal breadwinner, although as the months pass he worries more. “I don’t want to be a 50-year-old pilot earning $40,000 a year,” he said, adding that his wife does not want to be married to a pilot with so little earning power.

Yes, Mr. Lawlor is employed.  But with his earnings slashed his standard of living must be adjusted accordingly.  And given his demoralized state, his spending might fall even further than his income.

His condition is not unique to the airline industry.   Governor Schwarzenegger has been forced to cut hours (and thus wages) for many California public workers.  Perhaps even more shocking, Colorado plans to lower the minimum wage in 2010.

Are there “green shoots” in the economy?  Yes, absolutely.  But the effects of the 2008 meltdown will continue to linger for years.  In the New Normal, we will have to get used to a far less robust growth rate, dragged down by falling or stagnant wage growth.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy